Mortgage Referrals: Who Can You Trust?

October 8, 2002, revised March 7, 2003, revised November 8, 2006, June 21, 2009

"I am anxious about getting a mortgage because everybody wants to make money from me. How do I know who I can trust?"

In the home loan market, that is a critically important question.

In most markets, one party to a transaction usually has more information than the other. The information disparity in the home loan market, however, is unusually large. Most borrowers are in the market only a few times in their life. They have limited time to learn the rudiments, never mind the many nuances, of an extremely complex transaction. In contrast, the professionals on the other side of the table know the nuances because they deal with them every day.

With that kind of imbalance, trust is critically important. Without it, borrowers may bounce from one loan provider to another, wasting everybody’s time. Or they may stick with one but drive him crazy with questions, demands and suspicions that make the process unpleasant for everybody.

Most mortgage shoppers deal with this problem by following referrals. Then the question is, How good are the referrals? Here are some comments on the major referral sources.

Referrals from Real Estate Sales Agents

Home purchasers accept more referrals from real estate sales agents than from all other sources combined. The homebuyer often establishes a relationship with the agent during the house-hunting phase, and the agent is there when the need for a mortgage arises.

Sales agents have the same interest as buyers in getting deals done. Hence, they refer clients to loan providers who can generally be depended upon to close on time.

Sales agents have no comparable interest in the mortgage price, and are not concerned if the price is a little above the market. However, the agent doesn’t want the price to be so far out of line that the borrower throws a fit and blames the agent.

Loan providers spend a lot of time cultivating the favor of sales agents. The law prohibits paying for referrals, but it is enforced selectively and sporadically, and violations occur. Sales agents are too numerous and small to attract the attention of HUD, which is responsible for enforcement.

I would much prefer a referral from an agent who doesn’t get paid by the loan provider, but I don't know any way to find this out.

Referrals From Sales Agents to Realtor Captives

A special case of sales agent referrals are those to in-house or "captive" loan providers. These are loan providers who have a close financial relationship with Realtor firms. Most large Realtor firms have captives.

It might appear that Realtor captives present the same problems as builder captives, but there are significant differences. In the case of Realtor captives, referrals do not involve house price concessions, and the abuses associated with this practice.

Furthermore, referrals to the captive are made by individual sales agents, not by the Realtor firm. Sales agents are independent contractors and can’t be forced to refer their clients to the captive lender. The captive must earn the trust and confidence of the agents. Many Realtor captives have failed because they have not been able to do this.

On balance, therefore, I view sales agent referrals to captive lenders as reliable or perhaps more reliable than referrals to outside lenders.

Referrals From Other Borrowers

Your close friend strongly recommends a loan provider he recently used. You know the source of the referral is trustworthy and has no financial interest in your selection, and that’s very important. But the opinion is based on a single experience that might be skewed – especially if his transaction and yours are very different.

Here are some questions to put to your referral source: First, how well did you do in the pricing, and how do you know? Did you shop other sources?

Second, how well did the loan officer do in Q and A? Was he willing to take the time to answer your questions? Have you checked any of his answers against other sources?

Third, how reliable was he? Did he do what he said he was going to do, when he said he was going to do it?

Referral from a trusted source can be valuable, but only if the source has solid reasons for it.

Referrals From Builders

Builder referrals are usually to a lender with whom the builder has a financial arrangement. Hence, they are suspect.

It is illegal for builders to require a buyer to borrow from a preferred lender, but it is not illegal to tie price concessions to use of that lender. Often, a buyer will find that, while the loan offered by the preferred lender is priced above what is available elsewhere, the over-charge is less than the value of the concessions.

In buying a new house, the buyer should shop the financing terms and concessions offered by the builder, as well as the house price. The extent of the overcharge on the loan should be measured in present value dollars by shopping one or more on-line lenders on the same day. This information arms the buyer for negotiations with the builder.

Referrals From the Mortgage Professor

I refer potential borrowers looking for the maximum assistance from a trustworthy source to Upfront Mortgage Brokers. They shop the market for the borrower and provide professional counsel on their mortgage options. Their fee to the borrower is set upfront, and if the borrower gets it in writing, I guarantee it. I have no financial ties to UMBs. See Upfront Mortgage Brokers.

I refer knowledgeable borrowers who want to control the mortgage selection process themselves to on-line lending sites of Upfront Mortgage Lenders (UMLs), which allow borrowers to shop anonymously on-line.

One of the UMLs is Amerisave, which, if accessed through my site, shows not only the price to the borrower but also its markup, which is analogous to a UMB's fee. Amerisave is committed to the markup shown there, even if the borrower cannot be approved except on sub-prime terms. I guarantee the markup and am paid a fee by Amerisave for providing the leads. 

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